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ood Products. Fuqua School of Business Emerging Markets Corporate Finance. Contents. Industry Overview WTC Wood Project Country Overview Risk Analysis Project Appraisal. 1. Industry Overview. The Tropical Wood Industry. U$ 6.6 billion industry

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  1. ood Products Fuqua School of Business Emerging Markets Corporate Finance

  2. Contents • Industry Overview • WTC Wood Project • Country Overview • Risk Analysis • Project Appraisal

  3. 1. Industry Overview

  4. The Tropical Wood Industry • U$ 6.6 billion industry • Vigorous growth in the past decade due to: • a) lower trade barriers • b) increasing demand for wooden furniture • c) buoyant construction and renovation activity in developed markets • Demand growth expected at 9-10% per annum in the medium term (ITC) • Gradual tendency to substitute wood for non-wood materials (bio-composite, plastic, aluminum) Source: International Trade Center, 2002

  5. The geography of the tropical wood industry Asia: 83% LA: 16% Africa: 1% Source: International Trade Center, 2002

  6. Forestry Potential Saturation Deforestation Extinction of wood species Asia Area (M of hs.) Larger potential More sustainable forest practices Latin America Source: International Trade Center, 2002

  7. The Bolivian Tropical Forest • 7th largest in the world (49 M hs.) • Over 360 wood species • Operating at less than 1% of its full potential • 1,000,000 hs. recently certified for sustainable exploitation • Currently low value-added commercial timber only

  8. 2. TWC Wood Project

  9. The Tropical Wood Consortium • Created in 2004 to explore investment opportunities in the Bolivian forestry sector • Spearheaded by Tahuamanu TAHUAMANU S.A SMEs (Bolivia) Large (Brazil, Ecuador) Technology Suppliers (Germany) Andean Development Corporation

  10. Tahuamanu S.A. • The world’s largest producer of processed Brazil Nuts • Seeking diversification (nut production reaching saturation) • Extensive experience in sustainable forest management • High managerial and industrial capacity • Long-established international marketing channels U$ 6M annual revenues Source: Tahuamanu, 2004

  11. RAW MATERIAL EXTRACTION TRANSP. PLANT PROCESS PRODUCT TRANSP. MARKETS Marketing Own extraction (30%) Hard (50%) Belem US (40%) Private concessions (50%) Sawing (50%) Plywood Brokers Land-River-Sea Subcontractors Soft (46%) Laminating (46%) Vermeer Subcontractors (70%) 58,000 m3/y of processed wood Europe (30%) Paranagua Santos 187,000 he of forest land /20y 130,000 m3/y of raw material Precious (4%) Slicing (4%) Panels Community-based suppliers (50%) La Paz Regional BR-AR (30%) Energy Land Maintenance Internalized activity Outsourced Wood Processing Project

  12. North American markets T Regional markets Future alternative ports European markets Transportation Alternatives

  13. Likely Financial Structure

  14. Key Success Factors • -Wood-Nut synergy (extraction, storage, transportation, labor) • -Economies of scale and scope • Tax-free industrial park (20% cost savings) • Low labor/production costs -Forestry management -International marketing -Industrial capacity (larger than most competitors) -Continuous technological upgrading -Knowledge of local suppliers -Continuous learning through inter-firm cooperation Price Advantage -Bolivian Tropical Forest at 1% of full capacity - One of the world's largest certified forest -International demand expected to grow steadily -Market integration (FTAA + MERCOSUR) - Modern regulatory and legal framework Growth Potential Internal capabilities SUCCESS Flexibility • Outsourcing • Strategic location • Transportation alternatives through BR/PER • Access to the Brazilian wood cluster • Isolated from political conflict

  15. Major obstacles and mitigating factors • Tahuamanu’s high managerial and industrial capabilities • Inter-firm cooperation (consortium modality) • Learning costs (new industry) • Lack of infrastructure (roads, communications) • Expensive energy • Lack of supporting and related industries • Long distance to ports • Political instability Strategic location (flexibility to use more reliable infrastructure in Brazil/Peru) Investment in a wood-based energy generating plant Strategic Location (access to the Brazilian wood-processing cluster) Value-added processed products with lower incidence of transportation costs Strategic location (isolated from the most conflictive regions)

  16. 3. Country Overview

  17. Bolivia: Basics • Landlocked country located in the center of South American • Area: 1 million sq km (about three times the size of Montana) • Population: 8.7 million • Natural resources: tin, natural gas, petroleum, timber and others • Poorest country in South America - poverty rate - 60% - GDP per capita - 900 USD Source: CIA, 2003, World Bank, 2003

  18. Bolivia: Economic Environment • 23 years of democracy and 20 years of market reforms • Economic Reforms Package: - liberalization of prices, exchange and interest rates • - privatizations - trade and capital account liberalization • Results : macroeconomic stabilization (low inflation rates, stable ER, etc.) • However: stagnant growth GDP growth:1.5%/y (1990-2001) Source: World Bank, 2004

  19. Bolivia: Key Comparative Indicators Source: World Bank, 2004

  20. Governance Indicators (2002) Source: D. Kaufman, A. Kraay, and M. Mastruzzi (2003). World Bank Policy Research Working Paper

  21. The major obstacles for doing business in Bolivia Source: World Bank, Doing business 2003

  22. Political Environment • Since 1980s – constant social tension driven by poor economic conditions, income and regional disparities, ethnic conflict and wide-spread drug production and trafficking. • Since the early 2003, conflicts have taken a violent tenor: • - in October 2003 President Gonzalo Sánchez de Lozada, an unconditional supporter of market reforms resigned after two months of rioting and strikes • - a separatist movement led by agricultural-rich elites in western Bolivia is gaining momentum • The current president has lost control over the congress and is seen as “weak” in dealing with social pressure. • Recent attempts to modify the legal framework for the energy sector has increased legal uncertainty.

  23. Comparative Historical Risk • Overall risk comprises: • Economic risk • Operational risk • Political risk World Markets Research Center, September 2004

  24. 4. Risk Assessment

  25. Cost of Capital Worksheet

  26. Risk Premium (Country)

  27. 5. Project Appraisal

  28. Cost of Debt

  29. Valuation

  30. Different Scenarios

  31. ood Products Thank you

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